States face budget shortfalls on eve of "big, beautiful bill" changes
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After years of feeling flush, states are now facing budget shortfalls — and that's before the cuts in the "one big, beautiful bill" kick in.
Why it matters: The blowback will be on everyday Americans. To make up for lost revenue, states can either raise taxes or cut services — on things like public education, healthcare and food assistance.
How it works: Unlike the federal government, states must balance their budgets.
- For the past several years, that's been going pretty well. A hot economy drove bigger tax receipts and, crucially, federal money flowed in from Biden-era legislation.
Where it stands: Now, not only has the Biden money tap run dry but the Trump administration is pulling back, or holding, funding and support for education, state health departments and climate projects.
- The larger economic picture is also working against states — the slumping job market, as well as tariffs are expected to curb revenue growth.
- "All those underlying macro drivers are expected to slow the revenue growth for states, and to continue to put pressure on the cost side of the income statement, making it harder and more challenging for states to keep up," says Jennifer Johnston, senior vice president and director of municipal bond research at Franklin Templeton, an investment management firm.
- "And we're seeing that across the country."
Zoom in: The "big, beautiful bill," digs the hole deeper in a few ways. First, the tax cuts.
- Some states align their income taxes with the federal income taxes — a cut from the top trickles down to a cut at the state level.
- For example, a state will follow the federal government's lead in calculating your adjusted gross income — which would be lower for many folks thanks to the big bill.
Where it stands: Colorado is now facing a $1.2 billion shortfall as a result of this math.
- New York is projecting a $3 billion loss in federal funds over its next fiscal year, per the state's budget director.
What to watch: The big bill also makes deep cuts to health care, food assistance and funding for climate resilience.
- Some of these will take time to fully kick in, and states will have to decide whether to fill in funding gaps or let the cuts happen. That could be painful.
When it comes to SNAP, or food stamps, states are now required under the big bill to pick up a share of its costs — previously 100% covered at the federal level.
- In most states, that's hundreds of millions of dollars a year, says Wesley Tharpe, a senior advisor for state tax policy at the Center for Budget and Policy Priorities.
- And states have the option to just opt out of SNAP entirely, he says.
- There's a similar risk that states will roll back Medicaid coverage, with the federal government pulling back.
- "You're potentially going to see really broad-based cuts to healthcare, food assistance, housing, education," Tharpe says.
The intrigue: Blue states are contemplating raising taxes on the rich to offset cuts, as the WSJ recently reported, to counter some of the impact.
Reality check: The tax cuts in the "big, bill" are expected to stimulate economic activity in the states and that could in the short term offset some of the slowdown.
The bottom line: "Right now, states have tough decisions to make," says Johnston from Franklin Templeton.
- States are generally in good shape right now. The flush years have helped states build up reserves, she says.
- "They are there for a rainy day, and this is likely to be the rainy day."
